24 Sep 2019
Many domestic buyers are adopting the wait and see approach but the overseas investors view the current situation as an opportunity to enter the buy to let property market which has been known for strong capital growth and higher rental yields. The geo-economic conditions are becoming erratic and the stock market returns are more like gambling where one can lose all the invested money, however, real estate provides an opportunity to own an asset, which can be rented or one can live in.
You are investing both time and money to buy the property to ensure that you do not go thinking that there is no potential loss, so you are properly prepared.
Rates of interest have a tendency to be a little higher on Buy-into Permit loans. You should check with the local authority to see what their requirements. As you can tell, you will find things to consider with regards to investing in rental properties.
1- What is a buy to let property?
Buy to let property is bought by landlords to rent it out. Such properties can be bought as an investment where one can get a mortgage for such investments but there can be some difference like one may have to pay higher rates for buy to let mortgage UK and the minimum deposit for it is 25% of the property value. The investors cannot assume they will get rental income all the time from such investment. There can be certain phases of voids when one will require a financial cushion to meet the mortgage payments. Also, the landlords may have to pay for major repair bills and handle other issues with such property and depending on the type of property, it may not be, sometimes, very easy to sell it.
2- Buy to let property investments
There are still a lot of advantages to investing in buy to let in the UK.
- The demand for homes is constantly growing and the supply is low. The average rent keeps increasing with the rate of inflation.
- The mortgage gives the chance to leverage existing wealth where about 72 percent of the landlords bought their first home using a mortgage.
- One requires the deposit with the buy to let mortgage UK as it helps to earn the income to cover 125% of the interest as payment. For example, to get a property worth over £200K, £50K may be required and the value can rise 10 percent in a year or two giving a higher percentage of the initial investment.
- People have been putting their money in the stock market but the recent trends in the stock market indicate huge instability. The earnings from UK stock market in the last ten years was 87% and there are many benefits of investing in stocks like it provides tax shelter where the investment that can be held in ISA or pension, and it will provide 46% tax relief on the investment amount. But pensions are meant for retirement where one may not get access to the money until you are 55(57 years for pensions from 2028). Also, the regulations related to pensions and taxations can modify as a new government is formed, on the other hand, buy to let property investments provide an alternative to spread and diversify to reduce the risk.
- Such investments can provide an opportunity to get back the money where it may take 2 months to find a buyer. It provides a flexible option for investment.
- The indecision among the domestic buyer, decline in property prices and decline in currency value attracted investment from overseas investors where interest has increased in all regions and the interest from buyers from America continues to grow.
3- Buy to let property for sale
There are more than 1.5 million landlords in England and a survey on 19,000 landlords found owners who put their buy to let property for sale were not confident that the properties will provide adequate returns in the next 10 years. During one of the biggest George Osborne budget changes, the higher rate mortgages tax relief came to an end, where landlords could sell mortgage interest payment against the rental incomes. The relief will be replaced with 20% mortgage interest relief in the next two years.
The Residential Landlords Association (RLA) survey finds the confidence of buyers dropped in the last few months over the tenancy fee where letting agents have banned the fees to tenants for referencing, contracts, inventories, and others. There are many things one needs to consider while deciding on selling the property -
- In case of sale of a vacant property, one will have to market the property and there are plenty of bureaucratic hoops, which may require attention.
- Such a property can be marketed to investors.
- The house with the tenant will need a process of eviction and it may lead to loss of rental income.
- Buy to let is subject to capital gains. One can offset some costs but if one has gained a lot from the investment in the property, the taxes and other costs can be high.
- The properties in the North East and Wales, if are accurately priced, take 22 and 17 days to sell. In Midlands, such properties took 17 days to sell (as per Rightmove data).
Halifax said in September 2019 the property prices are holding steady despite Brexit and homeowners were reluctant to enter a transaction.
Zoopla Research finds realistically pricing helps in getting a buyer fast.
Since 1 June 2019, the fees the agents or landlords charge a tenant has been reduced by the law. Some agents want to pass the additional cost on to the landlords and this is indirectly leading to a rise in rents. But if the landlords increase the rents, their income will increase and their tax liability will also increase. With the introduction of the new Section 21, the landlords will be forced to retain tenant.
4- Tax for buy to let property
The recent data from UK finance shows new buy to let mortgage UK lending was low to 14.3% y-o-y and remortgage was up by 4.5% to £2.3bn. UK landlords have opposed the government’s action of higher taxes on selling assets.
As per the new rules, an increase in capital gains tax to 18.6 percent has been imposed. Further, after 2016 Brexit referendum, the average UK house price was at £210,872 and now the home price is at £230,292 – with 9.2 percent increase in the last 3 years, which is below the 22.1% rise of the previous three years. Also, there are many landlords who are no longer getting the rents to cover the cost of the property and the political environment is unsupportive and they are forced to sell the properties where they will have to pay the CGT that is paid on the profits made from the sale of the asset, where the annual CGT allowance is £12,000 (2019/20).
One may have to pay CGT 18% (28% on a second home), that depends on the UK basic rate or the higher rate taxpayer. In the last financial year, the receipt on such taxes increased from £7.8bn to £9.2bn which shows a number of landlords were selling up.
For landlords, many other changes have been made in regulations like minimum space, energy efficiency, five-year electrical safety checks and how to manage the redress schemes.
5- What's the best way to build a buy to let property portfolio in the UK?
The current market is favorable for investment in property as the home prices are low. The Land Registry Price Index shows that the prices fell, while the prices vary dramatically from one region to other, town and even street. The market could offer an opportunity to grab a bargain as the capital growth is very low and one may have to focus on the yields to achieve by investing in buy to let. As per Hamptons International research, the second half of the year 2018 was able to get an average yield of 5.9 percent, while the north of England delivered yields up to 11 percent.
The higher rate tax relief on the mortgage and the additional 8 percent on capital gains, together made buy to let less profitable but still, the option is attractive for investors interested in diversifying into lucrative assets. If the buyer has taken a fixed-rate mortgage for the property, one may have to give the early repayment charges, and for the five-year fix mortgage – the charges can be 5 percent on the balance.
Many investors are considering buy to let which provides an option to invest in multiple different types of properties in different cities and some regions like Manchester, East Ridings of Yorkshire and North-East Derbyshire are getting 100 percent of the asking price on the sale of such properties. Zoopla found the cities Salford, Driffield and Dronfield can achieve 100 percent of the asking price in the last one year, whereas, in London, the average home price achieved was 94.6 percent of asking price.
6- How do I choose a buy to let property?
Before investing in such properties one should follow try to evaluate the following -
- Determine the budget to invest.
- Conduct research on the local property market as the house prices are volatile in some places.
- Identify the type of property you are interest in and the value it can offer in the future.
- Calculate the rental yields and other capital growth potential.
- Also, try to assess the type of tenant one can get in such a place and what are the risks of investing in such properties.
To know more about UK properties, click Hamilton International Estates (www.hamiltoninternationalestates.com).
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